A limited partnership investment is one of the best ways to offer goods or services that help users meet their needs while generating revenue. Usually, the business entails two or more partners who come together to form a business, each contributing to the formation and growth of the company.
With some guidance, nearly anyone can start an LP with no complex compliance required. Since the venture it’s not treated as a corporate, taxation is at the individual level upon dividing the income.
If you want to establish a limited partnership, here is a step-by-step guide;
Understanding Different Types of Partnership
Once you decide to create a limited partnership, exploring other types of partnership ventures is advisable to make a concrete decision. This will allow you to gauge which one perfectly suits your aspirations. Apart from LP, there are others like general partnerships, joint ventures, and LLP.
A general partnership is where a business is formed by two or more people who have equal responsibilities in running a business. Therefore, they share responsibilities, profit, and losses.
Joint venture is when two or more partners with common interests come together to form a business to accomplish a project. When the venture achieves its goals, it can be dissolved or transformed into a general partnership.
A limited liability Partnership (LLP) is an investment where all the partners have limited liabilities.
How Are Limited Partnerships Formed? 5-Steps Explained
When forming a limited partnership business, it’s important to formalize it. Whether starting the business with your lifetime partner, childhood friend, or close relative, going through the proper process is advisable to avoid legal and other issues and enjoy LP benefits. The following steps are involved when forming this kind of investment.
1. Choose the Business Name
The first step once you decide to create a partnership investment is to choose a name. As simple as it sounds, starting a business name involves many considerations to avoid legal issues with existing businesses.
Your business name should be unique; therefore, consult online databases, local inventories, and other places to ensure your name doesn’t infringe on other business identities.
A unique name is vital since it helps market the brand and evoke curiosity among the customers. Also, choosing the right one ensures you can stick by it for a long time without renaming your business. Remember, changing a business name can be costly. After you get the name, it must have a “Limited Partnership/LP/L.P” phrase.
2. Select A Registered Agent to Accept Your Legal Documents
A registered agent is vital in LP as they handle governmental and taxing correspondence, summons, regulatory changes, and other legal matters. These agents then notify their client, in this case, your business, and advise you accordingly.
When forming an LP, ensure you choose a reliable agent to ensure you can navigate any legal obligations smoothly. Besides, these agents ensure the organization and filing of all crucial documents issued by the government on behalf of your business.
3. Drafting A Partnership Agreement
Drafting a partnership agreement is a necessary step when forming an investment. Whether an investment has two or multiple partners, an agreement must be drawn to enable smooth running and conform with legal requirements. The documents detail the following aspects.
- Business name and purpose
- Defining general and limited partners
- Decision-making process and voting right
- Shares ownership
- Capital contributions
- Business dissolution guidelines
4. Obtain and File Limited Partnership Certificate
An investment must file a certificate of partnership as it’s a requirement by the state. The document is legal proof that the business exists; all members must sign it. LP certificates usually contain the following information.
- Limited partnership business name
- General business characteristics
- Business agent office address, location, and written consent
- Business address, location, and business address of each member
- Date of LP expected dissolution
- Members’ contribution to business
- Ant other important matters agreed by members
5. Get Business Licenses and Other Approval Documents
At this step, you are a step away from completing the process. Getting licenses for your new business is vital as it can’t operate without it. If you are experienced in the process, you can pursue it to cut any cost through the service charges by third-party. Alternatively, you can contact a local business lawyer to guide you.
Besides the regular licenses, you should also research whether other certifications are needed for your business. A good lawyer should be able to guide you through to ensure you obtain all necessary licenses and other vital components.
What Are the Benefits and Downsides of Limited Partnership?
A limited partnership offers a variety of benefits. That is common in family businesses, commercial real agent companies, estate planning, and other professional businesses. Some of the major benefits of starting an LP include;
- Easier taxation terms
- High flexibility in management
- Liability protection for limited partners
- The less complicated formation process
Although business brings these benefits, there are also downsides. The main one is that general partners don’t have liability protection. If a case is brought against the business, they are liable, even their personal property.
Conclusion
Forming a limited partnership is excellent when you want to enjoy passive income. It’s a great idea since you can start an investment even when you don’t have capital. By drafting terms and conditions, your friend can fund your business, and you run it.
With simpler establishment steps than companies, LP is some of the best considerations. However, it’s worth knowing the benefits and risks involved.
